IMF Approves STF Drawing for Uzbekistan

The International Monetary Fund (IMF) has approved a drawing by Uzbekistan equivalent to SDR 49.875 million (about US$74 million) under the systemic transformation facility (STF)1 to support the Government's program of macroeconomic stabilization and systemic reform over the next year. At the same time, the Government intends to reach understanding with the IMF as soon as possible on a comprehensive program that could be supported by a stand-by arrangement in the upper credit tranches.

Background

Important steps have been taken since the beginning of 1994 to accelerate the process of transforming the Uzbek economy from a centrally planned to a market-based system, and to establish a comprehensive and coherent macroeconomic program for the period ahead.

The introduction of the national currency, the sum, in July 1994, was followed by a significant tightening of financial policies, which together with seasonal factors helped reduce inflationary pressures, cutting the monthly average price increase from 22 percent in the first half of 1994 to 1-1/2 percent during the third quarter. However, the liberalization of several prices and the adjustment of a number of public utility prices, coupled with seasonal factors, resulted in significant price increases in the fourth quarter; in December prices rose by 11-1/2 percent and during the twelve-month period ended December 1994 inflation was nearly 425 percent. The Government regards the reduction of inflation and the stabilization of the sum as its key short-term objectives.

The output decline in Uzbekistan continues to be much smaller than in most other countries of the former Soviet Union. With large share of production concentrated in tradable commodities such as energy, cotton, and gold. Uzbekistan appears to have been able to escape to some extent the impact of trade disruptions with its traditional partners.

The 1995 Program

The authorities have formulated a comprehensive macroeconomic program for 1995 aimed at moving forward the process of transforming the Uzbek economy from a centrally planned to a market-based system. The financial program, supported by incomes policy measures, aims at reducing the monthly rate of price increases to 4-5 percent by mid-year 1995 and to 2 percent by end-1995, and limit the decline in real GDP to 4 percent. To these ends, the consolidated deficit will be held at 3-1/2 percent of GDP, of which 2 percent will be financed by the domestic banking system. Monetary and credit policies are designed to be consistent with the overall program targets, and will be achieved mainly by limiting the amount of credit provided by the central bank to commercial banks and through the maintenance of positive real interest rates in the banking system.

Structural Reforms

The 1995 program is designed to accelerate the reform process, and includes several systemic and institutional reforms. The authorities intend to further liberalize prices, phase out direct budgetary subsidies, and address the issue of privatizing medium and large-scale enterprises. The rationing system for sugar, vegetable oils, and flour will be phased out, and limits on profit margins for other goods will remain in force only for monopolies and certain medicines. Domestic energy prices will continue to be adjusted to fully cover the cost of supply.

An action plan has been developed with the World Bank specifying the scope, approach, and timetable of the privatization of medium and large-scale enterprises, including a new mass privatization scheme to be adopted by March 31, 1995. In the agricultural sector, 25 percent of all irrigated land will be leased to private farmers and families by mid-1995, rising to about 40 percent by the end of the year.

Addressing Social Costs

The authorities have initiated a program of allowances for low-income families as the main element of their targeted social safety net. For 1995, it is envisaged that these allowances will continue and that every poor family (536,000 out of about 4 million families) will receive monthly transfers equal to two minimum wages, at a cost to the budget of about 1-1/2 percent of GDP. In addition, family allowances, which are linked to the minimum wage, are expected to amount to slightly more than 1 percent of GDP in the 1995 budget.

The Challenge Ahead

Uzbekistan's economic potential is considerable, given its position as a major cotton and gold producer. The country needs, however, a far-reaching process of reform and stabilization, of which the present program is the first stage. More substantial systemic reform and stabilization efforts will be required to overcome inflation and to lay the conditions for resumed growth.

Uzbekistan joined the IMF on September 21, 1992, and its quota2 is SDR 199.5 million (about US$294 million). The STF is the first use of IMF financing by Uzbekistan.

Uzbekistan: Selected Economic Indicators

1992

1993

1994*

1995**

(percent change)

Real economic growth

–11.1

–2.4

–2.6

–4.0

Retail prices

910

885

423

84

(percent of GDP)

Consolidated fiscal balance (deficit –)

–18.0

–12.0

–3.5

–3.5

(million U.S. dollars)

Current account balance (deficit –)

–239

–429

–432

–670

Sources: Uzbek authorities; and IMF staff estimates.
*Estimates.
**Program.1. The IMF established the STF as a temporary financing window to provide assistance to member countries facing balance of payments difficulties arising from severe disruptions on their traditional trade and payments arrangements owing to a shift from reliance on trading at non-market prices to multilateral market-based trade.2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting rights, its access to IMF financing, and its share in the allocation of SDRs.